For those who want to target the US in raising capital, many ask how they go about accepting investor funds.
The most common exemptions to registering with the SEC are the 506b and 506c
Not only is the structure (one-off deal vs syndication vs fund) important, but the regulations and jurisdiction.
Common questions
Visit the "Investment Company Act of 1940" at https://www.sec.gov/investment/laws-and-rules and understand the decisions you make
2. What is Regulation D and why does it matter?
Regulation D (Reg D) is an SEC regulation that deals with the sale of stock shares or bonds to a small group of investors.
It doesn't concern companies offering equity in the public markets
In the US, Reg D was made to assist private companies raise money cheaper, without having to register with the SEC (Securities and Exchange Commission).
It allows the private company to raise money through the sale of equity, which is an ownership percentage of the company or startup in the form of units or shares (could be one or multiple classes). It "exempts" someone from registering.
As a fund manager, Reg D is your friend because it allows you to place capital fast.
3. What is an accredited investor?
You’re an accredited investor if you meet at least one of these qualifications:
you have an individual or joint net worth more than $1M (this excludes the value of your primary residence)
you’ve had $200,000 income in each of the last two (2) years
you’ve had $300,000 joint income in each of the last two (2) years
you’re professional certification qualifies you as an accredited investor
you're a Director or Executive Officer of the Fund’s General Partner
you’re a knowledgeable employee of the private fund or its managers (this includes employees, executive directors, directors, trustees, and advisory board members. You also need to have at least 12 months tenure)
and more....
If you’re an entity, you must meet at least one of these qualifications:
each equity owner of your entity is an accredited investor
your entity has total assets worth more than $5M
you’re a “family office” with $5M+ assets under management (AUM)
you’re an Investment Advisor
you’re an Exempt Investment Adviser
you’re a private business development company
you’re an investment company or a business development company
you’re a Small Business Investment Company
In Canada, exempt market dealers are the equivalent
4. What is a non-accredited investor?
Put simply, a non-accredited investor is the opposite of an accredited investor:
you do not have an individual or joint net worth more than $1M
you have not had $200,000 income in each of the last two (2) years
you have not had $300,000 joint income in each of the last two (2) years
you are not professional certification qualifies you as an accredited investor
you are not a Director or Executive Officer of the Fund’s General Partner
you are not a knowledgeable employee of the private fund or its managers
You may hear people refer to non-accredited investors as “retail investors” like those who invested in ICO's back in the day.
5. Quick way to figure out which exemption is right for you
506b funds could be better if …
you have a robust network of investors to raise from
you want to raise capital fast
you want to minimize costs
you want to keep things quiet
506c funds could be better if …
you have the time and resources to verify your investors
you’d like to advertise your fund and raise more capital
Hope you enjoyed this article by raises.com
See ya in the inbox!
Sebastian Amieva
Investor / M&A Expert / Mentor
www.sebastianamieva.com